Does the CPI Mirror Costs-of-Living? Engel's Law Suggests Not in Norway

Erling Røed Larsen ()
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Erling Røed Larsen: Statistics Norway, https://www.ssb.no/en/forskning/ansatte

Discussion Papers from Statistics Norway, Research Department

Abstract: There is considerable interest in identifying the magnitude of the difference between increases in CPI and costs-of-living, and this article uses the technique proposed by Hamilton (2001) to measure this discrepancy for Norway for the 90s. The method is extended along several dimensions by introducing a framework in which measurement errors are modelled. A non-parametric approach is then employed to segment households into demographic types while allowing for flexibility in costs-of-living increases for different standards. Hamilton finds that American CPI overstates costs-of-living in the U.S. for the period 1974-1991, Norwegian results for 1990-1999 indicate that CPI sometimes may understate costs-of-living, perhaps because of a credit-financed boom in house prices. The Norwegian CPI rose 22 percent in the period, but the general consumer behaved as if costs-of-living increased more than 35 percent. For some segments of society, for example single-person households, the increase was substantially larger, suggesting potentially important distributional effects.

Keywords: Almost-Ideal-Demand-System; consumer price index bias; cost-of-living; demand for food; Engel's Law; household behavior; house prices; inflation; real income; standards of living (search for similar items in EconPapers)
JEL-codes: C13 D12 E31 (search for similar items in EconPapers)
Date: 2004-02
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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